A Comment -- General Comments From an Expert (A Commentary)

People are bored with it, and the sector's down. That's why he loves it. People had overblown expectations about 3 years ago. The narrative hasn't changed, but sometimes things take 5-6 years to play out. Many investors have the right 5-6 year narrative, but they have 2-3 month strategies. The time required to realize $$ on their strategies often exhausts their patience.

Clues on undervalued stocks: No analyst coverage

Look for companies that have absolutely no analyst research coverage. At times, this can be a red flag: maybe there is something at the company that analysts don’t like, so do not bother covering the company at all. But no coverage can also create opportunities. Owning a stock with no brokerage talking about it can often work out very well when they do start talking and promoting the company. It is surprising sometimes how little attention some companies get from the Street. IES Holdings Inc., for example, is a US$5 billion company in the electrical contracting business. Despite its stock being up 200 per cent in the past year and more than 20 per cent this year already, it has not a single analyst covering the stock. Zoomd Technologies Ltd. in Canada is much smaller, with its market cap at publication at about $85 million, but you would think that its more than 1,000 per cent gain in the past year might attract at least some attention. But no, not a single analyst.
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We have to take some cues from history. When you look at the 2018 trade war between the US and China, the S&P 500 did drop nearly 20% in Q4. But it rebounded with a 31.5% return in 2019. The other thing is that when he looks at the last 6 corrections of 10% or more (which is what we're facing now with the S&P 500), going back to 2009, the 1-year return was 40%. 

That's the past; doesn't mean history will repeat, buy it often rhymes. The fundamentals are still solid in the US. GDP was fairly solid in the last quarter. Inflation ticked down. Consumer remains pretty solid. Unemployment is hovering near multi-decade lows at 4.1%.

He wonders how much is posturing and how much is negotiation. Premature to say we're looking at a recession down the road. 

In 2018-19, inflation was around 1.9-2%. So even with tariffs coming on a much bigger economy (China is 20% of world GDP), markets still came out OK.

Choppiness will continue as long as this rhetoric is there. But we also need to look at some of the political considerations coming up. US mid-term elections are next year. Will the US administration stem some of ?the talk and put policies in place that will help the economy, such as deregulation and tax cuts? Such moves would help the economy and the stock market.

This is an opportunity for investors to take advantage of some of the names that are down 15-20% or more. He's using cash to add to high-quality names he likes for the next 3-5 years.

Looking 6-12 months out, and assuming we don't fall into recession, look at financials (soft landing, relatively low inflation and unemployment, increasing business activity). Financials will be big beneficiaries of deregulation and tax cuts from Trump administration.

Industrial sector should also do well. He's focusing on the US, though it can tie into the Canadian sectors as well. In the US, there will be more of a focus on domestic manufacturing. Names like CAT and OTIS.

Selectively, be in the tech and communications sector. Mag 7's are back to 2017-18 levels on valuation. Growth rates of 15% or more are still there.

No, it's actually easier when you get signals that are either extremely bearish or extremely bullish. Last year, we had an over-the-top bullish market. So we were very overdue a strong correction. He's been raising cash.

He's been saying since January that we were going to fall off a cliff a bit, not only for the Trump tariff thing. The market is like a balloon. You blow up the balloon, and then the balloon gets too tight. The market just looks for an excuse to deflate.

Tariffs come on, and markets sell off. Look at Covid, the 2008 sub-prime bubble, the 2000 tech bubble. Even in 2022, the market was overdone on both technical and fundamental factors.

He's seeing sector trends. He's been trying to rotate into commodities that aren't related to financial assets like the stock market. Not all commodities look great. 

He bought tons of gold and still likes it, though it's really had a run and probably a little overbought. A couple of months ago he said to buy nat gas on its breakout, it's done quite well, and he still likes nat gas and its producers. He bought some US bonds, as it's likely that their economy's going to be a bit tighter with tariffs and stuff. They've done OK.

There's always stuff you can buy that makes money. "Money doesn't sleep" as they say; it always goes somewhere. He's holding cash, bonds, and non-correlated assets. He does own some stocks that have suffered, but it's counter-balanced by the things that are doing well. You have to be really mobile.

He uses money flow, and volume is a component of that -- it takes whether the market went up or down, and then attaches whether the volume went up or down. The resulting line tells you whether money was flowing into or out of the market. Then he looks at the momentum of that money flow, using an indicator such as MFI (money flow index).

For a while now, money flow has been falling. Volume's been going up, so it can fool you! The money flow was telling him that volumes were up because people were getting out. If the market keeps moving down, he's looking to raise more cash.

Technical analysis is the main tool you want in markets like this.

The shorter indicators move around a lot. So the 200-day takes out a lot of the daily noise and tells you the general trend. 

As well, a lot of what he does is behavioural finance -- all about what people think is going to happen. So many people believe in the 200-day MA, it becomes a self-fulfilling prophecy :)  The S&P recently broke the 200-day MA because the market's bad; then people point to it and say, "Oh no, the 200-day MA broke, so that's bad."

Icing on the cake. It can matter if you get too many shorts on a crowded trade, and they suddenly have to start covering because the stock's moving up. For example, if the stock broke out of a base. That's the only time he'd pay attention to it.

If something breaks out, you don't buy on day 1. If something breaks down, you don't bail on day 1 either. You have to count a few days, because you can get a head fake. His rule is a minimum of 3 days, usually 3-6 days, before he makes his move. And his move means legging in a little at a time. The range he waits and watches is 3 days to 3 weeks.

Beware of the "dead cat" bounce. 

One of the original concepts of technical analysis is that everything is discounted in the price. So, for example, we already know about the tariffs, so they're already discounted in the price. But you don't know what's going to happen next. He likes the more liquid stocks, because more participants make up a crowd and you can read the crowd sentiment.

He doesn't do intraday analysis, it's fairly meaningless for him. He looks for trades that can last him 3-6 months, or longer if they can.